Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of 3M’s financial statements with a narrative from the perspective of management. 3M’s MD&A is presented in eight sections:
● Overview
● Results of Operations
● Performance by Business Segment
● Performance by Geographic Area
● Critical Accounting Estimates
● New Accounting Pronouncements
● Financial Condition and Liquidity
● Financial Instruments
Forward-looking statements in Item 7 may involve risks and uncertainties that could cause results to differ materially from those projected (refer to the section entitled “Cautionary Note Concerning Factors That May Affect Future Results” in Item 1 and the risk factors provided in Item 1A for discussion of these risks and uncertainties).
Additional information about results for year end 2018 and certain year-on-year comparisons between 2019 and 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
OVERVIEW
3M is a diversified global manufacturer, technology innovator and marketer of a wide variety of products and services. As more fully described in both the Performance by Business Segment section in MD&A and in Note 19, effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets and customers. Additionally, the Company consolidated the way it presents geographic area net sales by providing an aggregate Americas geographic region (combining former United States and Latin America and Canada areas). Also, effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker changed and, as a result, the Company’s disclosed measure of segment profit/loss has been updated. Business segment information presented herein reflects the impact of these changes for all periods presented.
3M manages its operations in four operating business segments: Safety and Industrial; Transportation and Electronics; Health Care; and Consumer. From a geographic perspective, any references to EMEA refer to Europe, Middle East and Africa on a combined basis.
Consideration of COVID-19:
3M is impacted by the global pandemic and related effects associated with the coronavirus (COVID-19). The Company updated its risk factors with respect to COVID-19, which can be found in Item 1A “Risk Factors” in this document.
Public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote working, have impacted 3M’s operations. 3M continues to work to protect its employees and the public, maintain business continuity and sustain its operations, including ensuring the safety and protection of people who work in its plants and distribution centers across the world, many of whom support the manufacturing and delivery of products that are critical in response to the global pandemic. COVID-19 has impacted 3M’s supply chains relative to global demand for products like respirators, surgical masks and commercial cleaning solutions. As this situation continues, 3M also closely monitors and responds to potential impacts to the Company’s broader supply chain associated with other products. COVID-19 has also affected the ability of suppliers and vendors to provide products and services to 3M. Furthermore, COVID-19 has impacted the broader economies of affected countries, including negatively impacting economic growth.The Company has taken steps to help employees lead safe and productive lives during the outbreak including remote working; escalated procedures in factories related to personal safety, cleaning and medical screening measures; and pandemic leave policies. 3M closely monitors how the spread of COVID-19 is affecting employees and business operations and has preparedness plans to help protect the safety of employees around the world while safely continuing business. While nearly all of our manufacturing locations and distribution centers are fully or partially operational, the Company
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implemented plant and/or line shutdowns during 2020 related to certain markets due to weaker customer demand or government mandates. Some of the above factors have increased the demand for 3M products, while others have decreased demand or made it more difficult for 3M to serve customers. Serving 3M customers is a priority and teams continue to communicate with individual customers about potential disruptions.
3M’s total sales increased 0.1% for the full year 2020 when compared to 2019. Organic local-currency sales decreased 1.7% for the full year 2020 when compared to 2019. Given the diversity of 3M’s businesses, the impact of COVID-19 varied across the Company throughout 2020. 3M experienced strong sales growth in personal safety, as well as in other areas such as home improvement, general cleaning, semiconductor, data center, and biopharma filtration. COVID-related respirator sales are estimated to have impacted year-on-year organic local-currency sales growth by approximately 3 percent for the year ending December 31, 2020. At the same time, weakness in several end markets, while improving, contributed in part to sales declines in a number of 3M’s businesses with the biggest year-on-year total sales decreases in oral care (down 19 percent), advanced materials (down 17 percent), automotive and aerospace (down 16 percent), commercial solutions (down 14 percent), stationery and office (down 11 percent), closure and masking (down 11 percent), automotive aftermarket (down 10 percent), and businesses aligned to general industrial applications such as abrasives (down 15 percent) and industrial adhesives and tapes (down 5 percent).
3M’s operating income margins increased 3.1 percentage points year-on-year for the year ending December 31, 2020. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items - (non-GAAP measures) section below, operating income margins increased 0.1 points to 21.3 percent for the year ending December 31, 2020 when compared to 2019. Various COVID-19 implications contributed in part to these results.
Overall, the impact of the COVID-19 pandemic on 3M’s consolidated results of operations was primarily driven by factors related to changes in demand for products and disruption in global supply chains as described above. While it is not feasible to identify or quantify all the other direct and indirect implications on 3M’s results of operations, below are factors that 3M believes have also affected its 2020 results:
Factors contributing to charges:
Factors providing benefits or other impacts:
● Lower self-insured medical visit/instance expense during 2020.
As previously disclosed, in light of circumstances, 3M took actions to ensure sources of cash may remain strong, including the March 2020 issuance of $1.75 billion of registered notes, suspension of share repurchases, and the decrease of its 2020 capital spending to approximately $1.5 billion. While capital spending decreased, it included additional expansion of respirator production capacity. 3M continues to have access to its commercial paper program and undrawn committed credit facility. Refer to the Financial Condition and Liquidity section below for more information on the Company’s liquidity position.
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The Company also continues to evaluate the extent to which it may avail itself of various government-sponsored COVID-response stimulus, relief, and production initiatives around the world, such as under the Defense Production Act (DPA) and CARES Act in the United States. During 2020 and into January 2021, 3M reached certain agreements with governments in the U.S. and other countries involving just over $250 million of asset funding to expand capacity to supply N-95 respirators.
Due to the speed with which the COVID-19 situation is developing and evolving and the uncertainty of its duration and the timing of recovery, 3M is not able at this time to predict the extent to which the COVID-19 pandemic may have a material effect on its consolidated results of operations or financial condition.
Earnings per share (EPS) attributable to 3M common shareholders – diluted:
The following table provides the increase (decrease) in diluted earnings per share for 2020 compared to the same period last year, in addition to 2019 compared to 2018. As applicable, certain items in the table reflect specific income tax rates associated therewith.
Year ended December 31,
Same period last year $ 7.81 $ 8.89
Significant litigation-related charges/benefits 1.01 1.28
TCJA measurement period adjustment — 0.29
Loss on deconsolidation of Venezuelan subsidiary 0.28 —
Gain/loss on sale of businesses (0.22) (0.73)
Divestiture-related restructuring actions — 0.18
Same period last year, excluding special items $ 8.88 $ 9.91
Increase/(decrease) in earnings per share - diluted, due to:
Organic growth/productivity and other (0.06) (0.60)
Non divestiture-related restructuring actions 0.12 (0.41)
Acquisitions/divestitures (0.10) (0.24)
Foreign exchange impacts (0.11) —
Income tax rate (0.03) —
Shares of common stock outstanding 0.04 0.22
Current period, excluding special items $ 8.74 $ 8.88
Significant litigation-related charges/benefits 0.07 (1.01)
Loss on deconsolidation of Venezuelan subsidiary — (0.28)
Gain/loss on sale of businesses 0.52 0.22
Divestiture-related restructuring actions (0.08) —
Current period $ 9.25 $ 7.81
Year 2020 EPS:
For year ended December 31, 2020, net income attributable to 3M was $5.384 billion, or $9.25 per diluted share basis, compared to $4.570 billion, or $7.81 per diluted share, for year ended December 31, 2019, an increase of 18.4 percent on a per diluted share basis.
The Company refers to various “adjusted” amounts or measures on an “adjusted basis”. These exclude special items. These non-GAAP measures are further described and reconciled to the most directly comparable GAAP financial measures in the Certain amounts adjusted for special items - (non-GAAP measures) section below.
On an adjusted basis, net income attributable to 3M was $5.088 billion, or $8.74 per diluted share for 2020 compared to $5.193 billion, or $8.88 per diluted share in December 31, 2019, a decrease of 1.5 percent on a per diluted share basis.
Additional discussion related to the components of the year-on-year change in earnings per diluted share follows:
Organic growth/productivity and other:
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Non divestiture-related restructuring actions:
Acquisitions/divestitures:
Foreign exchange impacts:
Income tax rate:
Shares of common stock outstanding:
Year 2019 EPS:
Organic growth/productivity and other:
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Non divestiture-related restructuring actions:
Acquisitions/divestitures:
Foreign exchange impacts:
Income tax rate:
Shares of common stock outstanding:
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Certain amounts adjusted for special items - (non-GAAP measures):
In addition to reporting financial results in accordance with U.S. GAAP, the Company also provides non-GAAP measures that adjust for the impacts of special items. For the periods presented, special items include the items described below. Beginning in 2020, the Company includes gain/loss on sale of businesses and divestiture-related restructuring actions as special items due to their potential distortion of underlying operating results. Information provided herein reflects the impact of this change for all periods presented. Operating income (measure of segment operating performance), income before taxes, net income, earnings per share, and the effective tax rate are all measures for which 3M provides the reported GAAP measure and a measure adjusted for special items. The adjusted measures are not in accordance with, nor are they a substitute for, GAAP measures. The Company considers these non-GAAP measures in evaluating and managing the Company’s operations. The Company believes that discussion of results adjusted for these items is meaningful to investors as it provides a useful analysis of ongoing underlying operating trends. The determination of these items may not be comparable to similarly titled measures used by other companies. Special items include:
Significant litigation-related charges/benefits:
Gain/loss on sale of businesses:
Divestiture-related restructuring actions:
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Loss on deconsolidation of Venezuelan subsidiary:
Measurement period accounting for TCJA:
Adjustments for special items:
Adjustments for special items:
Adjustments for special items:
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Year 2020 sales and operating income by business segment:
The following tables contain sales and operating income results by business segment for the years ended December 31, 2020 and 2019. Refer to the section entitled “Performance by Business Segment” later in MD&A for additional discussion concerning 2020 verses 2019 results, including Corporate and Unallocated. Refer to Note 19 for additional information on business segments, including Elimination of Dual Credit.
2020 vs 2019
Net % of Oper. Net % of Oper. Net Oper.
Business Segments
Corporate and Unallocated (1) — (363) 110 0.3 (1,130) — —
Year ended December 31, 2020
Worldwide Sales Change Organic local- Total sales
Safety and Industrial 3.5 % — % (0.6) % (0.7) % 2.2 %
Transportation and Electronics (7.1) — (1.1) 0.2 (8.0)
Consumer 4.1 — — (0.5) 3.6
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Year 2020 sales results by geographic area/business segment:
Percent change information compares the year ended December 31, 2020 with the same period last year, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.
Year ended December 31, 2020
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Components of net sales change:
Volume — organic (1.2) % (2.9) % (4.0) % — (2.3) %
Organic local-currency sales (0.2) (3.4) (2.8) — (1.7)
Acquisitions 5.5 0.7 2.8 — 3.5
Divestitures (1.5) (0.2) (2.9) — (1.4)
Translation (1.3) 0.6 1.0 — (0.3)
Total sales change 2.5 % (2.3) % (1.9) % — 0.1 %
Total sales change:
Safety and Industrial 2.8 % (1.4) % 4.7 % — 2.2 %
Transportation and Electronics (15.4) % (2.4) % (12.9) % — (8.0) %
Health Care 20.5 % (0.8) % 3.8 % — 12.3 %
Consumer 5.2 % (1.3) % 1.5 % — 3.6 %
Organic local-currency sales change:
Safety and Industrial 5.0 % (1.5) % 5.6 % — 3.5 %
Transportation and Electronics (11.4) % (2.8) % (13.8) % — (7.1) %
Health Care 3.9 % (6.0) % 0.2 % — 1.0 %
Consumer 6.3 % (2.2) % 0.1 % — 4.1 %
Additional information beyond what is included in the preceding table is as follows:
Foreign currency translation decreased year-on-year sales by 0.3 percent, while selling prices increased by 0.6 percent year-on-year for 2020, with price growth in EMEA and Americas, while Asia Pacific decreased.
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Year 2019 sales results by geographic area/business segment:
Percent change information compares the full year 2019 with the full year 2018, unless otherwise indicated. Additional discussion of business segment results is provided in the Performance by Business Segment section.
Year ended December 31, 2019
Europe,
Asia Middle East Other
Americas Pacific & Africa Unallocated Worldwide
Components of net sales change:
Volume — organic (1.5) % (2.8) % (2.2) % — (2.1) %
Organic local-currency sales (0.7) (2.9) (0.9) — (1.5)
Acquisitions 3.5 0.3 1.0 — 2.0
Divestitures (0.6) (0.2) (1.9) — (0.7)
Translation (0.6) (1.7) (4.6) — (1.7)
Total sales change 1.6 % (4.5) % (6.4) % — (1.9) %
Total sales change:
Safety and Industrial (5.3) % (7.6) % (11.0) % — (7.2) %
Transportation and Electronics (3.8) % (5.3) % (6.6) % — (5.1) %
Health Care 15.5 % 2.5 % 0.6 % — 8.9 %
Consumer 2.2 % (2.8) % (4.6) % — 0.5 %
Organic local-currency sales change:
Safety and Industrial (3.3) % (4.7) % (2.4) % — (3.4) %
Transportation and Electronics (3.3) % (4.1) % (2.2) % — (3.6) %
Health Care 1.1 % 3.1 % 1.4 % — 1.5 %
Consumer 2.6 % (1.1) % 0.4 % — 1.7 %
Additional information beyond what is included in the preceding table is as follows:
Foreign currency translation decreased year-on-year sales by 1.7 percent, while selling prices increased by 0.6 percent year-on-year for 2019, with price growth in EMEA and Americas, while Asia Pacific was flat.
Managing currency risks:
The stronger U.S. dollar had a negative impact on sales in full year 2020 compared to the same period last year. Net of the Company’s hedging strategy, foreign currency negatively impacted earnings for full year 2020 compared to the same period last year. 3M utilizes a number of tools to hedge currency risk related to earnings. 3M uses natural hedges such as pricing, productivity, hard currency and hard currency-indexed billings, and localizing source of supply. 3M also uses financial hedges to mitigate currency risk. In the case of more liquid currencies, 3M hedges a portion of its aggregate exposure, using a 12, 24 or 36 month horizon, depending on the currency in question. For less liquid currencies, financial hedging is frequently more expensive with more limitations on tenor. Thus, this risk is largely managed via local operational actions using natural hedging tools as discussed above. In either case, 3M’s hedging approach is
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designed to mitigate a portion of foreign currency risk and reduce volatility, ultimately allowing time for 3M’s businesses to respond to changes in the marketplace.
Financial condition:
3M generated $8.1 billion of operating cash flow in 2020, an increase of $1.0 billion when compared to 2019. This increase was primarily due to cost saving actions taken in response to COVID-19 and lower year-on-year significant litigation-related charges and the timing of associated payments. This followed an operating cash flow increase of $631 million when comparing 2019 to 2018. Refer to the section entitled “Financial Condition and Liquidity” later in MD&A for a discussion of items impacting cash flows.
In November 2018, 3M’s Board of Directors replaced the Company’s February 2016 repurchase program with a new repurchase program. This new program authorizes the repurchase of up to $10 billion of 3M’s outstanding common stock, with no pre-established end date. In 2020, the Company purchased $0.4 billion of its own stock, compared to purchases of $1.4 billion in 2019. As of December 31, 2020, approximately $7.8 billion remained available under the authorization. In the first quarter of 2020, the Company suspended repurchases under its board-approved share repurchase program with other repurchase activity limited to 3M’s stock compensation plans. The Company plans to resume share purchases in 2021. In February 2021, 3M’s Board of Directors declared a first-quarter 2021 dividend of $1.48 per share, an increase of 1 percent. This marked the 63rd consecutive year of dividend increases for 3M.
Raw materials:
In 2020, the coronavirus (COVID-19) pandemic caused fluctuations in supply markets. Generally, as demand for certain COVID-related products surged, 3M saw a corresponding tightening in supply and some degree of price inflation in associated markets. Within the supply chain of less essential products, 3M experienced raw material price deflation as economies slowed and certain producers scaled back or idled operations. Conversely, as markets re-opened and demand increased, the Company experienced raw material price inflation with some level of stabilization late in the year.
In response, the Company continued to deploy productivity projects to minimize the impact of raw material inflation and market supply challenges, including input management, reformulations, and multi-sourcing activities. Overall, on a consolidated basis, 3M experienced net raw material deflation in 2020. To date, the Company is receiving sufficient quantities of all raw materials to meet its reasonably foreseeable production requirements. It is difficult to predict future shortages of raw materials or the impact any such shortages would have. 3M has avoided disruption to its manufacturing operations through careful management of existing raw material inventories, strategic relationships with key suppliers, and development as well as qualification of additional supply sources. 3M manages spend category price risks through negotiated supply contracts and price protection agreements. In addition, 3M evaluates suppliers’ conformance with environmental and social compliance requirements.
Pension and postretirement defined benefit/contribution plans:
On a worldwide basis, 3M’s pension and postretirement plans were 87 percent funded at year-end 2020. The primary U.S. qualified pension plan, which is approximately 67 percent of the worldwide pension obligation, was 91 percent funded and the international pension plans were 93 percent funded. The U.S. non-qualified pension plan is not funded due to tax considerations and other factors. Asset returns in 2020 for the primary U.S. qualified pension plan were 13.6%, as 3M strategically invests in both growth assets and fixed income matching assets to manage its funded status. For the primary U.S. qualified pension plan, the expected long-term rate of return on an annualized basis for 2021 is 6.50%. The primary U.S. qualified pension plan year-end 2020 discount rate was 2.55%, down 0.70 percentage points from the year-end 2019 discount rate of 3.25%. The decrease in U.S. discount rates resulted in an increased valuation of the projected benefit obligation (PBO). The primary U.S. qualified pension plan’s funded status decreased 1 percentage point in 2020 due to the higher PBO resulting from the discount rate decrease and partially offset by higher return on assets. Additional detail and discussion of international plan asset returns and discount rates is provided in Note 13 (Pension and Postretirement Benefit Plans).
3M expects to contribute approximately $100 million to $200 million of cash to its global defined benefit pension and postretirement plans in 2021. The Company does not have a required minimum cash pension contribution obligation for its U.S. plans in 2021. 3M expects global defined benefit pension and postretirement expense in 2021 to decrease by approximately $40 million pre-tax when
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compared to 2020. Refer to “Critical Accounting Estimates” within MD&A and Note 13 (Pension and Postretirement Benefit Plans) for additional information concerning 3M’s pension and post-retirement plans.
RESULTS OF OPERATIONS
Net Sales:
Refer to the preceding “Overview” section and the “Performance by Business Segment” section later in MD&A for additional discussion of sales change.
Operating Expenses:
Selling, general and administrative expenses (SG&A) 21.5 21.9 (0.4)
Research, development and related expenses (R&D) 5.8 5.9 (0.1)
Gain on sale of businesses (1.2) (0.4) (0.8)
Operating income margin 22.3 % 19.2 % 3.1 %
Operating income margins increased year over year for 2020. The increase from 2019 to 2020 was primarily driven by lower significant litigation-related charges and higher gains on divestitures (net of divestiture-related restructuring actions) year-on-year. These items are further described in the Certain amounts adjusted for special items - (non-GAAP measures) section above. A number of factors impact the various income statement line items. Expanded discussion of each of the income statement line items follows in the various sections below.
In 2020 the Company’s operating expenses were impacted by factors described in the preceding Overview – Consideration of COVID-19 section above.
In 2020 and 2019, 3M approved and committed to certain restructuring actions that impacted cost of sales, SG&A, and R&D (see Note 5 for additional details). In addition to actions related to divestitures (as discussed earlier in the Certain amounts adjusted for special items - (non-GAAP measures) section), for 2020 these included charges to address certain COVID-related impacts and actions to further enhance its operational and marketing capabilities. In 2019, charges included actions in light of slower than expected 2019 sales and associated with realigning its organizational structure and operating model.
Pension and postretirement service cost expense is recorded in cost of sales, SG&A, and R&D. In total, 3M’s defined benefit pension and postretirement service cost expense increased $31 million in 2020. Refer to Note 13 (Pension and Postretirement Plans) for the service cost components of net periodic benefit costs.
The Company is investing in an initiative called business transformation, with these investments impacting cost of sales, SG&A, and R&D. Business transformation encompasses the ongoing multi-year phased implementation of an enterprise resource planning (ERP) system on a worldwide basis, as well as changes in processes and internal/external service delivery across 3M.
Cost of Sales:
Cost of sales includes manufacturing, engineering and freight costs.
Cost of sales, measured as a percent of sales, decreased during 2020 when compared to 2019. Decreases were related to lower significant litigation-related charges taken in 2020, which were partially offset by 2020 COVID-related net impacts, including period expenses of unabsorbed manufacturing costs, in addition to higher restructuring action charges taken in 2020 along with certain related follow-on accelerated depreciation. In addition, selling prices increased year-on-year by 0.6 percent for full year 2020, and lower raw material costs reduced cost of sales as a percentage of sales.
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Selling, General and Administrative Expenses:
SG&A in dollars decreased slightly in 2020 when compared to 2019. The decrease was driven by cost saving actions taken in response to COVID-19, in addition to benefits from prior year restructuring (and adjustments thereto in 2020). Additional factors that decreased SG&A in 2020 also include lower year-on-year impact related to significant litigation-related charges. In terms of SG&A as a percent of sales, partially offsetting these decreases was the overall effect of the COVID-19 pandemic on sales that resulted in higher costs as a percent of sales. SG&A was also impacted by increased spending year-on-year related to Acelity, which was acquired in the fourth quarter of 2019.
Research, Development and Related Expenses:
R&D in dollars decreased slightly in 2020 when compared to 2019 and remained relatively consistent as a percent of sales at 5.8% in 2020 compared to 5.9% in 2019. 3M continued to invest in its key initiatives, including R&D aimed at disruptive innovation programs with the potential to create entirely new markets and disrupt existing markets. Incremental R&D spending in 2020 included activities related to the Acelity business acquired in the fourth quarter of 2019. 3M also experienced lower year-on-year restructuring activities impacting R&D.
Gain on Sale of Businesses:
During the first quarter of 2020, the Company recorded a pre-tax gain of $2 million ($1 million loss after tax) related to the sale of its advanced ballistic-protection business and recognition of certain contingent consideration. During the second quarter of 2020, the Company recorded a pre-tax gain of $387 million ($304 after tax) related to the sale of substantially all of its drug delivery business.
During the first quarter of 2019, the Company sold certain oral care technology comprising a business and reflected an earnout on a previous divestiture resulting in a pre-tax gain of $8 million ($7 million gain after tax). In the third quarter of 2019, 3M recorded a gain related to the divestiture of the Company’s gas and flame detection business and an immaterial impact as a result of measuring a disposal group at the lower of its carrying amount or fair value less cost to sell, which in aggregate resulted in a pre-tax gain of $106 million ($79 million after tax). Refer to Note 3 for additional details on divestitures.
Operating Income Margin:
3M uses operating income as one of its primary business segment performance measurement tools. Refer to the table below for a reconciliation of operating income margins for 2020 and 2019.
Year ended December 31,
Same period last year 19.2 % 22.0 %
Significant litigation-related charges/benefits 2.4 2.7
Gain/loss on sale of businesses (0.4) (1.6)
Divestiture-related restructuring actions — 0.4
Same period last year, excluding special items 21.2 % 23.5 %
Increase/(decrease) in operating income margin, due to:
Organic volume/productivity and other (0.1) (1.7)
Non divestiture-related restructuring actions 0.2 (0.8)
Acquisitions/divestitures (0.5) (0.6)
Selling price and raw material impact 0.7 0.4
Foreign exchange impacts (0.2) 0.4
Current period, excluding special items 21.3 % 21.2 %
Significant litigation-related charges/benefits — (2.4)
Gain/loss on sale of businesses 1.2 0.4
Divestiture-related restructuring actions (0.2) —
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Year 2020 operating income:
Operating income margins increased 3.1 percentage points in 2020 when compared to 2019. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items – (non-GAAP measures) section above, operating margins increased 0.1 percentage points to 21.3 percent in 2020 when compared to 2019.
Additional discussion related to the components of the year-on-year change in operating income margins follows:
Organic volume/productivity and other:
Non divestiture-related restructuring actions:
Acquisitions/divestitures:
Selling price and raw material impact:
Foreign exchange impacts:
Significant litigation-related charges:
Gain/loss on sale of businesses:
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Divestiture-related restructuring actions:
Year 2019 operating income:
Operating income margins decreased 2.8 percentage points for the full year 2019 when compared to full year 2018. Factoring out the impact on operating income of special items as described in the Certain amounts adjusted for special items – (non-GAAP measures) section above, operating margins decreased 2.3 percentage points to 21.2 percent in 2019 when compared to 2018.
Organic volume/productivity and other:
Non divestiture-related restructuring actions:
Acquisitions/divestitures:
Selling price and raw material impact:
Foreign exchange impacts:
Significant litigation-related charges:
Other Expense (Income), Net:
See Note 6 for a detailed breakout of this line item.
The decrease in other expense (income) during 2020 was primarily due to the 2019 impact of deconsolidation of the Company’s Venezuelan subsidiary. Refer to Note 1 for additional details.
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Interest expense (net of interest income) increased during 2020 and 2019. The increase in 2020 was due to higher U.S. average debt balances and lower year-on-year interest income driven by lower average interest rates on cash balances. 2020 interest expense also included an early debt extinguishment charge in conjunction with the repayment of notes in December 2020. The increase in 2019 was driven by higher U.S. average debt balances, partially offset by the year-on-year increase in interest income driven by higher balances in cash, cash equivalents and marketable securities during the year resulting from the proceeds from debt issuances in advance of the October 2019 Acelity acquisition.
In addition, other expense (income) was impacted by lower year-on-year pension and postretirement net periodic benefit non-service benefits for 2020 and 2019, respectively. The lower year-on-year benefit in 2020 was primarily due to the increased expense from lower December 31, 2019 discount rates. The decreases in 2019 was primarily due to the charge associated with the voluntary retirement program taken in the second quarter of 2019 in addition to the pension settlement charges in the fourth quarter of 2019 related to employee retirements. Refer to Note 13 for additional details.
Provision for Income Taxes:
Effective tax rate 19.6 % 19.8 %
The effective tax rate for 2020 was 19.6 percent, a decrease of 0.2 percentage points when compared to 2019. The effective tax rate for 2019 was 19.8 percent, compared to 23.4 percent in 2018, a decrease of 3.6 percentage points. Factors that impacted the tax rates between years are further discussed in the Overview section above and in Note 10.
3M currently estimates its effective tax rate for 2021 will be approximately 20 to 21 percent.
The tax rate can vary from quarter to quarter due to discrete items, such as the settlement of income tax audits, changes in tax laws, and employee share-based payment accounting; as well as recurring factors, such as the geographic mix of income before taxes.
Refer to Note 10 for further discussion of income taxes.
Income from Unconsolidated Subsidiaries, Net of Taxes:
Income (loss) from unconsolidated subsidiaries, net of taxes $ (5) $ —
Income (loss) from unconsolidated subsidiaries, net of taxes, is primarily attributable to the Company’s ownership interest in Kindeva using the equity method of accounting following 3M’s divestiture of the drug delivery business in 2020. See Note 3 for further discussion.
Net Income Attributable to Noncontrolling Interest:
Net income (loss) attributable to noncontrolling interest $ 4 $ 12
Net income (loss) attributable to noncontrolling interest represents the elimination of the income or loss attributable to non-3M ownership interests in 3M consolidated entities. The primary noncontrolling interest relates to 3M India Limited, of which 3M’s effective ownership is 75 percent.
Currency Effects:
3M estimates that year-on-year currency effects, including hedging impacts, decreased pre-tax income by $81 million in 2020 and increased pre-tax income by $1 million in 2019. This estimate includes the effect of translating profits from local currencies into U.S. dollars; the impact of currency fluctuations on the transfer of goods between 3M operations in the United States and abroad; and transaction gains and losses, including derivative instruments designed to reduce foreign currency exchange rate risks. 3M estimates that year-on-year foreign currency transaction effects, including hedging impacts, decreased pre-tax income by approximately $21 million in 2020 and increased pre-tax income by approximately $201 million in 2019. These estimates include transaction gains and
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losses, including derivative instruments designed to reduce foreign currency exchange rate risks. Refer to Note 14 in the Consolidated Financial Statements for additional information concerning 3M’s hedging activities.
PERFORMANCE BY BUSINESS SEGMENT
Item 1, Business Segments, provides an overview of 3M’s business segments. In addition, disclosures relating to 3M’s business segments are provided in Note 19. Effective in the first quarter of 2020, the Company changed its business segment reporting in its continuing effort to improve the alignment of businesses around markets. Also, effective in the second quarter of 2020, the measure of segment operating performance used by 3M’s chief operating decision maker (CODM) changed and, as a result, 3M’s disclosed measure of segment profit/loss (business segment operating income) has been updated for all periods presented. The change to business segment operating income aligns with the update to how the CODM assesses performance and allocates resources for the Company’s business segments.
As discussed in Note 19, 3M discloses business segment operating income as its measure of segment profit/loss, reconciled to both total 3M operating income and income before taxes. Business segment operating income includes dual credit for certain related operating income (as described below in “Elimination of Dual Credit”). Business segment operating income excludes certain expenses and income that are not allocated to business segments (as described below in “Corporate and Unallocated”). Additionally, the following special items are excluded from business segment operating income and, instead, are included within Corporate and Unallocated: significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions.
Information provided herein reflects the impact of these changes for all periods presented. 3M manages its operations in four business segments. The reportable segments are Safety and Industrial; Transportation and Electronics; Health Care; and Consumer.
Corporate and Unallocated:
In addition to these four business segments, 3M assigns certain costs to “Corporate and Unallocated,” which is presented separately in the preceding business segments table and in Note 19. Corporate and Unallocated includes a variety of miscellaneous items, such as corporate investment gains and losses, certain derivative gains and losses, certain insurance-related gains and losses, certain litigation and environmental expenses, corporate restructuring charges and certain under- or over-absorbed costs (e.g. pension, stock-based compensation) that the Company determines not to allocate directly to its business segments. Additionally, Corporate and Unallocated operating income includes special items such as significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring costs. Corporate and Unallocated also includes sales, costs, and income from contract manufacturing, transition services and other arrangements with the acquirer of the Communication Markets Division following its 2018 divestiture through 2019 and the acquirer of the former drug delivery business following its 2020 divestiture. Because this category includes a variety of miscellaneous items, it is subject to fluctuation on a quarterly and annual basis.
Corporate and Unallocated net operating loss decreased by $767 million in 2020 when compared to 2019.
Special Items
Refer to the Certain amounts adjusted for special items - (non-GAAP measures) section and Note 5 for additional details on the impact of significant litigation-related charges/benefits, gain/loss on sale of businesses, and divestiture-related restructuring actions that are reflected in Corporate and Unallocated.
Other Corporate Expense - Net
Other corporate operating expenses increased in 2020. The increases were due to year-over-year increased net costs as a result of the regular review of 3M’s respirator mask liabilities, lower year-on-year gains from certain property sales reflected in Corporate and Unallocated, in addition to transition service and other arrangement costs, net of income, post-divestiture of the Company’s former drug delivery business in 2020, and increased legal expenses. These increases were partially offset by lower year-on-year non divestiture-related restructuring costs reflected in Corporate and Unallocated.
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Operating Business Segments:
Information related to 3M’s business segments is presented in the tables that follow. Organic local-currency sales include both organic volume impacts plus selling price impacts. Acquisition impacts, if any, are measured separately for the first twelve months post-transaction. The divestiture impacts, if any, foreign currency translation impacts and total sales change are also provided for each business segment. Any references to EMEA relate to Europe, Middle East and Africa on a combined basis.
The following discusses total year results for 2020 compared to 2019 and 2019 compared to 2018, for each business segment. Refer to the preceding “Sales and operating income by geographic area” section for organic local-currency sales growth by business segment within major geographic areas.
Safety and Industrial Business (36.6% of consolidated sales):
Sales change analysis:
Organic local-currency 3.5 % (3.4) %
Divestitures (0.6) (1.7)
Translation (0.7) (2.1)
Total sales change 2.2 % (7.2) %
Business segment operating income (millions) $ 3,054 $ 2,510
Percent change 21.7 % (12.2) %
Percent of sales 26.0 % 21.8 %
Year 2020 results:
Sales in Safety and Industrial totaled $11.8 billion, an increase of 2.2 percent compared to the same period last year. Organic local-currency sales increased 3.5 percent, divestitures decreased sales by 0.6 percent, and foreign currency translation decreased sales by 0.7 percent.
On an organic local-currency sales basis:
Divestitures:
● In August 2019, 3M completed the sale of its gas and flame detection business.
Business segment operating income:
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Year 2019 results:
Sales in Safety and Industrial totaled $11.5 billion, down 7.2 percent in U.S. dollars, compared to full year 2018. Organic local-currency sales decreased 3.4 percent, divestitures decreased sales by 1.7 percent, and foreign currency translation decreased sales by 2.1 percent.
On an organic local-currency sales basis:
Divestitures:
● In May 2018, 3M divested an abrasives glass products business.
● In August 2019, 3M completed the sale of its gas and flame detection business.
Business segment operating income:
Transportation and Electronics Business (27.4% of consolidated sales):
Sales change analysis:
Organic local-currency (7.1) % (3.6) %
Divestitures (1.1) —
Translation 0.2 (1.5)
Total sales change (8.0) % (5.1) %
Business segment operating income (millions) $ 1,927 $ 2,221
Percent change (13.3) % (16.0) %
Percent of sales 21.8 % 23.2 %
Year 2020 results:
Sales in Transportation and Electronics totaled $8.8 billion, down 8.0 percent in U.S. dollars. Organic local-currency sales decreased 7.1 percent, divestitures decreased sales by 1.1 percent, and foreign currency translation increased sales by 0.2 percent.
On an organic local-currency sales basis:
Divestitures:
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Business segment operating income:
Year 2019 results:
Sales in Transportation and Electronics totaled $9.6 billion, down 5.1 percent in U.S. dollars. Organic local-currency sales decreased 3.6 percent, and foreign currency translation decreased sales by 1.5 percent.
On an organic local-currency sales basis:
Business segment operating income:
Health Care Business (25.9% of consolidated sales):
Sales change analysis:
Organic local-currency 1.0 % 1.5 %
Acquisitions 15.5 9.4
Divestitures (4.1) —
Translation (0.1) (2.0)
Total sales change 12.3 % 8.9 %
Business segment operating income (millions) $ 1,828 $ 1,858
Percent change (1.6) % (3.1) %
Percent of sales 21.9 % 25.0 %
Year 2020 results:
Sales in Health Care totaled $8.3 billion, up 12.3 percent in U.S. dollars. Organic local-currency sales increased 1.0 percent, acquisitions increased sales by 15.5 percent, divestitures decreased sales by 4.1 percent, and foreign currency translation decreased sales by 0.1 percent.
On an organic local-currency sales basis:
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Acquisitions:
Divestitures:
Business segment operating income:
Year 2019 results:
Sales in Health Care totaled $7.4 billion, up 8.9 percent in U.S. dollars. Organic local-currency sales increased 1.5 percent, acquisitions increased sales 9.4 percent, and foreign currency translation decreased sales by 2.0 percent.
On an organic local-currency sales basis:
Acquisitions:
Divestitures:
Business segment operating income:
● Operating income margins decreased 3.1 percentage points year-on-year.
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Consumer Business (16.6% of consolidated sales):
Sales change analysis:
Organic local-currency 4.1 % 1.7 %
Translation (0.5) (1.2)
Total sales change 3.6 % 0.5 %
Business segment operating income (millions) $ 1,249 $ 1,124
Percent change 11.2 % 3.7 %
Percent of sales 23.4 % 21.8 %
Year 2020 results:
Sales in Consumer totaled $5.3 billion, an increase of 3.6 percent in U.S. dollars. Organic local-currency sales increased 4.1 percent and foreign currency translation decreased sales by 0.5 percent.
On an organic local-currency sales basis:
Business segment operating income:
Year 2019 results:
Sales in Consumer totaled $5.2 billion, an increase of 0.5 percent in U.S. dollars. Organic local-currency sales increased 1.7 percent and foreign currency translation decreased sales by 1.2 percent.
On an organic local-currency sales basis:
Business segment operating income:
PERFORMANCE BY GEOGRAPHIC AREA
While 3M manages its businesses globally and believes its business segment results are the most relevant measure of performance, the Company also utilizes geographic area data as a secondary performance measure. Export sales are generally reported within the geographic area where the final sales to 3M customers are made. A portion of the products or components sold by 3M’s operations to its customers are exported by these customers to different geographic areas. As customers move their operations from one geographic area to another, 3M’s results will follow. Thus, net sales in a particular geographic area are not indicative of end-user consumption in that geographic area. Financial information related to 3M operations in various geographic areas is provided in Note 2 and Note 19.
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Refer to the “Overview” section for a summary of net sales by geographic area and business segment.